The revenue and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of engineering, procurement and construction (EPC) compes will decline around 15 per cent year-on-year in the current financial year as COVID-19 led lockdowns reduced the project execution pace, according to India Ratings and Research (Ind-Ra).
However, the demand drivers seem to be healthy, it said.
The order book of the top 18 EPC players declined 6 per cent year-on-year in FY20 after registering extraordinary growth during FY16 to FY19, in which it almost doubled to Rs 2.1 lakh crore from Rs 1.2 lakh crore. Players with focus on road, building and metro registered significant growth in their order book.
While growth in the road segment was supported by government plans to increase the pace of road construction in the country to 30 km per day in FY19 from 15 to 16 km per day in FY16, the building and housing segment was supported by Pradhan Mantri Awaas Yojana (PMAY) scheme.
Urban infrastructure's share in the order book also grew to 9 per cent in FY20 from 3 per cent in FY16. The road and building segment, which accounted for the major share of 63 per cent in the overall order book, fell 10 per cent in FY20, impacting segment players.
Players with focus on housing and metro projects registered significant growth in FY20. Overall, the order book and revenue, though declined to 2.6x in FY20 from the peak of 3.28x in FY18, remained healthy.
Debtor days increased slightly in FY20 to around 113 days from 107 days in FY19. However, the overall working capital requirement in the industry exacerbated due to the lockdown in March increased which was mainly funded by debt.
Flattish EBITDA and higher debt resulted in return on capital employed for the sector declining to 14.2 per cent from 16.9 per cent in the same period while also deteriorating the credit metrics slightly. Net leverage increased to 1.8x in FY20 from 1.6x in FY19 and interest coverage fell to 3.2x from 4.0x.
The extended lockdown in Q1 FY21 and related restriction are likely to significantly impact the operating performance of the construction players in FY21. Basis Ind-Ra discussions with sector players, the situation improved in July with almost all the project sites having commenced operations.
An increase in central and state government fiscal deficit in FY21 can impact both order inflow and collection in the sector and it remains a key monitorable for the sector outlook, said Ind-Ra.
( With inputs from ANI )